Invest Rs 63,000 and save full Income Tax on Rs 1,00,000 under Sec 80C!

The Happy New Year feeling is finally over as we are fast approaching the end of Financial Year 2009-10. Well the saddest part of financial year end is you need make all your investments in whatever way you can before March 31st and pay all your remaining taxes.

As part of Tax planning and investment I had a done an article of Best ELSS funds to invest in 2010. Now I would like to tell you how you can take full advantage of Section 80C (which permits exemption of 1 Lac if you invest the same in some long term instruments like PPF, ELSS, Insurance etc) by actually investing just Rs 63000.

It sounds too good to be true! But hold on and let’s go back 3 years i.e. March 2007. As usual you thought you would make your tax saving investment and you actually didn’t realize and it’s already March. To add to your woes you just have Rs. 65,000 with you but need to invest Rs 1,00,000. God now what … seems you have to pay the entire tax.

But seems luck is still on your side and you spot news in one of the popular Mutual Fund Websites. “Birla Sunlife Mutual Fund has declared a dividend of 500% (i.e. Rs. 50/- per unit on face value of Rs.10/-per unit) under the dividend option of Birla Sunlife Tax Relief 96 fund. The record date for the same would be March 16, 2007.”

So What?

Well probably you didn’t realize but Lady Luck is definitely smiling on you. Now you just need to follow the following steps

Step 1: You already have Rs 65,000 but you initially need to invest Rs 1,00,000. So you would need to arrange for Rs 35,000 as a very short term loan (for a maximum period of 1 month) from your friends, family or bank.

Step 2: Invest the entire 1 Lac in Birla Sunlife Tax Relief 96 fund on or before March 15, 2007. Let’s assume you invested on 15th March when the NAV was 135.23. So you would get 739.48 units.

Step 3: Actually you have now to do nothing. Just sit back, relax & wait for the declared dividend to be credited to your bank account.

So how much dividend you would get on your 1 Lac investments?

You have 739.48 units and Rs 50/unit is the dividend declared. So you would be paid back Rs. 36,974. This amount is totally tax free and comes back to you in maximum of 1 month. (SEBI guidelines states Mutual Funds need to credit Dividend within 30 days of declaration). You can now pay back your loan with this dividend.

So what you have essentially done is exhausted your 1 Lac 80C tax benefit by just investing Rs 63,025 instead of Rs 1 Lac.

Ok all this is great but I think it was a one off case. You won’t get these opportunities always! Isn’t it?

Umm… not exactly I have some examples

Dividend history of Birla Sun Life Tax Relief 96 – Dividend

Record Date

Rate of Dividend

Dividend (Rs.)/Unit

NAV as of Dividend Date (Rs.)

Dividend Yield

Dividend payout on Rs 1 Lac invested (Rs.)

31-Aug-09

40%

4

79.66

5%

5,021

27-Jun-08

50%

5

74.61

7%

6,702

25-Mar-08

200%

20

101.8

20%

19,646

16-Mar-07

500%

50

134.27

37%

37,238

19-Jan-07

260%

26

176.54

15%

14,728

So in fact if you had invested on or before 19th January 2007, you would have got more than half of your investment back as dividend in just 3 months.

Here is another fund – Principal Personal Taxsaver which did a similar thing in 2008.

Dividend history of Principal Personal Taxsaver

Record Date

Rate of Dividend

Dividend (Rs.)/Unit

NAV as of Dividend Date (Rs.)

Dividend Yield

Dividend payout on Rs 1 Lac invested (Rs.)

25-Mar-08

400%

40

124.66

32%

32,087

26-Feb-08

200%

20

172.57

12%

11,589

31-Dec-07

110%

11

221.26

5%

4,972

30-Oct-07

110%

11

190.53

6%

5,773

13-Mar-06

100%

10

118.96

8%

8,406

Here too if you had invested in Principal Personal Taxsaver by 26th Feb 2008, you would have got around 45% back as dividend in 3 months.

But what about 2009, no funds gave such a dividend?

We all know what stock markets world wide went through in whole of FY 2008-09. All the funds were in red. But you would be surprised there were funds like HDFC Taxsaver – Dividend which gave 50% dividend (Rs. 5/unit) on March 6, 2009 at the NAV of Rs.31.155., which translates in almost 16% dividend yield which is not bad given the bloodshed in the stock markets. So in this case you would have got back Rs. 16,000 from your Rs 1 Lac investment.

You know you just keep on boring me by talking of past. Do you have anything which I can use for my Tax Planning for the present year (2009-10)?

Relax! You would have a lot of opportunities this year. The stock markets have doubled since last year and so you can expect a good dividend payout by some funds. Moreover as you can see historically such dividends start rolling in from February. So you still have time. But keep in mind you should not invest in a fund just because it’s paying good dividend. I recommend any of the following 5 funds from the list of ELSS funds. These are great funds & some of them like HDFC Taxsaver actually have a very good and consistent history of divided payout and returns. Hereon I would keep you posted as soon as any of these funds declare dividend for this year.

Some Caveats:

The above method is for people who either are short of cash for full Tax planning or in need of liquidity in near future or people who are smart enough to generate greater returns than they would by investing in ELSS funds. As far as I am concerned I don’t like to invest in dividend schemes as I like to use this opportunity of tax saving for creating long term wealth.

The second point is you should not keep Dividend payout as the only criteria for investing in an ELSS. It can be one of the criteria.

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